By Dejan Ilijevski
I often get asked by parents how much money they should save in a 529 plan for their child’s education. Because many of the variables that determine the cost of college (such as SAT scores, scholarships, the choice of school, room and board, and financial aid eligibility) often don’t become clear until the child is in high school, making early estimations on how much to save in a 529 plan is challenging.
Today, there is more peace of mind for parents who are worried about ending up with too much money in a 529 plan.
As of Jan. 1, 2024, a change in the rules for 529 education savings plans allows excess money not used for a beneficiary’s education to be rolled over to a Roth individual retirement account (IRA). While there are many rules for making it happen, this is great news to parents who are concerned about stranding money in a 529 plan. Some parents might also delight in helping their child get a jump on retirement saving and investing.
What Changed?
In December 2022, Congress passed the SECURE 2.0 Act to help Americans save better for retirement. The legislation was aimed at improving the options available for saving for retirement, and changes to 529 plans were among the improvements, including being able to roll money out of your 529 plan into a Roth IRA.
If parents invest money in a 529 education savings plan and a student doesn’t go to college or earns a scholarship, parents may be hesitant to take the money from the 529 because of taxes and penalties. With the change, parents in that situation now have the opportunity to move money from the 529 plan to a Roth IRA.
The new law allows up to $35,000 over a lifetime to be rolled over from a 529 plan to a Roth IRA—and that process is tax-free and penalty-free. Both savings vehicles are funded by after-tax dollars.
The Guidelines for Getting It Done
As always, you have to go to the fine print to really see what’s going on. While the change is likely to be welcomed by many parents, Congress put up some guardrails that may not help you immediately unless you’re planning well ahead.
Here are the rules for converting the money in a 529 plan to a Roth IRA:
- You must have had your 529 account for at least 15 years.
- Your yearly conversion is capped at the annual IRA contribution limit.
- Money eligible to be rolled over must have been in your 529 plan for at least five years.
- The owner of the Roth IRA must be the same as the beneficiary of the 529 plan.
Keep these rules in mind and be careful about the choices you make relating to your 529 plan. For instance, you could reassign the beneficiary—another child, a niece, or a nephew—and the 15-year period would start over again.
And since the rules are new, Congress may continue to tweak them. Keep in mind that there may be more to come.
The Benefits of Converting to a Roth IRA
If you’re a family that can navigate the rules to take advantage of the change, being able to convert your 529 plan to a Roth IRA can have several benefits.
The biggest benefit you can see is getting your money out of your 529 plan without the taxes and penalties you would have faced without the change.
With a Roth IRA, you can also access greater investment options. With a 529 plan, you have to take whichever investment option is available; however, with the Roth IRA, you can choose whatever investments suit you.
And how about the chance to start your child down the path to saving for retirement before they even finish college? Unless you change the beneficiary on the 529 plan early enough to move the Roth IRA savings to someone else, your child can have a retirement nest egg to add to later.
Find Out More
Do you have money in a 529 plan that you might want to convert to a Roth IRA? Or, now that you know you have options for any stranded funds, do you want to open a 529 plan? As a financial advisor at SCM Investment Services, I can help guide you through the decision-making process.
Are you ready to make the most of your financial journey? To schedule a complimentary introductory meeting or request a free financial health checkup, call (612) 324-0629 or email dejan@scminvesting.com.
About Dejan
Dejan Ilijevski is Financial Advisor, Investment Manager, and Founder of SCM Investment Services, an independent, fiduciary, fee-only financial advisory and investment management firm based in Lake Elmo, Minnesota. With an evidence-based approach to investing grounded in economic theory and reliant on insights from financial science, he customizes globally diversified portfolios of mutual funds and ETFs for his clients. With 20 years of experience in the trading/financial services industry, and described as trustworthy and community-oriented, Dejan is passionate about helping individuals and families, prioritizing their best interests first and foremost.
Originally Dejan pursued a career in research and technology but was recruited by a startup trading firm at the Chicago Board of Trade. He took advantage of this rare opportunity, curious to learn more about capital markets. Dejan’s technical background provided a unique skill set. By the end of his rookie year, he routinely transacted over $1 billion in U.S. Treasury notes daily, making him one of Chicago’s biggest bond traders. He consistently earned the highest profits for the firm for many years and continued to advance professionally in the trading arena.
With newfound experience and insight, Dejan came to realize his parents were being exploited by their financial advisor and that the financial services industry does not work in your best interest. After earning his MBA from the University of Chicago Booth School of Business, Dejan left the trading industry to start an independent financial advisory firm based on integrity and transparency and built on the belief that everyone deserves trusted, knowledgeable financial advice—blending Wall Street expertise with Main Street values.
Serving the broader community as an investor advocate, a proponent for financial literacy, and sponsoring nonprofit initiatives, Dejan is a trusted subject matter resource for many financial news media publications. He and his wife, Daniela, reside in Munster, Indiana, with their two kids. In his free time, he enjoys road cycling, reading, playing soccer, traveling, going on adventures (even skydiving!), and serving local charities. To learn more about Dejan, connect with him on LinkedIn.
